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Annual Percentage Rate (APR)

The annual percentage rate of a loan basically tells you how much that loan would cost you in a year, even if it is paid off sooner or later. It's the percentage of the amount borrowed that you would pay in a year.

Here is a simple example... If you borrow $100 with 5-percent interest and the loan is for a year, your APR would be 5 percent. However, if you borrow the same $100 with the same 5-percent interest, but it's due in one month, the APR would be 60 percent (5 percent times 12, because it would cost you $5 for the same $100 every month).

Similarly, if a credit card has a monthly interest rate of 1.5 percent, the APR actually would be 18 percent, because you would be paying 1.5 percent each month for 12 months (1.5 x 12 = 18).

APR is useful in comparing loans because you're comparing how much each loan would cost over the same period of time.

Other common situations make the calculation more complicated. What's important for the purposes of our discussions is the basic understanding provided above.

Basis

In financial transactions, the basis is the amount you paid for something that you're now selling.

If you sell an investment such as stock or real estate, your tax liability is determined by your profit (how much you sold it for minus the basis).

Referenced by...
Trump would bypass Congress for $10 billion tax cut for richest (2018-Aug-30)

Capital Gains

Income you make by investing money (as opposed to earning a salary for your labor).

Referenced by...
Trump would bypass Congress for $10 billion tax cut for richest (2018-Aug-30)

Credit Freeze

A tool that lets you prevent potential creditors from viewing your credit report.

This is useful in preventing identity theft, because the thief will not be able to open a new account in your name.

Freezing your credit must be done individually with each credit reporting agency.

If you later apply for credit, you first would need to unfreeze your credit at each credit reporting agency. This often must be done at least a few days ahead of time. You then would need to refreeze your credit (again at each agency) if you want the continued protection.

Depending on the state you live in, credit reporting agencies can charge a small fee to both freeze and unfreeze your credit.

Referenced by...
Banking law weakens safeguards, gives half-billion to banks (2018-May-24)

Credit Report/Score

Your credit report and score estimate the risk of lending you money.

Your credit report contains a list of your accounts (such as credit cards and loans), including information such as your credit limit, your outstanding balance, and your payment history.

Your credit score is a number that is calculated based on the information in your report. It often is referred to as a FICO score - an acronym for Fair Isaac Company - the company that developed the algorithms that calculate your score for the agencies.

The higher your score the more a bank is likely to lend you, and the lower your interest rate may be. But it can be used in other ways. An apartment might charge a higher security deposit if your credit score is low. It might affect whether you are offered a job.

You have three credit scores - one from each of the main credit reporting agencies. You're entitled to a free copy of your credit report from each of the three agencies. To find out how, visit our Resources page.

Credit Reporting Agencies

Companies that monitor your credit history - including accounts you hold and your payment record. The three main companies that perform this function are...

o Equifax
o Experian
o TransUnion

If you fail to make payments on a loan or credit card, for example, the bank may report the delinquency to any of these agencies.

The information is used by companies you want to conduct certain types of business with, such as applying for a loan or credit card, renting an apartment, buying a cell phone under a contract, or even applying for a job.

Referenced by...
Banking law weakens safeguards, gives half-billion to banks (2018-May-24)

Distressed Asset

Something that is offered for sale at a price significantly below value because the owner needs to sell it quickly.

Dodd-Frank

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a 2010 law intended to prevent a recurrence of the financial crisis that hit the nation in 2008.

Click here to read our explanation of the bill.

Referenced by...
Banking law weakens safeguards, gives half-billion to banks (2018-May-24)
House passes bill to revoke consumer and financial protections (2017-Jun-08)
Bills would eliminate Consumer Financial Protection Bureau (2017-Feb-14)
Rule to disclose payments to foreign governments nullified (2017-Feb-14)
Senate confirms Jay Clayton to head SEC (2017-Jan-04)

Down Payment

When you take out a loan to buy something expensive such as a car or a house, you often will pay a small portion of the price up front, and then borrow the remainder.

The money you pay up front is what's called the down payment.

Fiduciary Rule

2016 regulation from the Department of Labor (DOL) that requires financial planners recommending investments for retirement accounts to provide advice in your best interest, rather than theirs.

For example, while an advisor is required to recommend investments suitable to your goals, he can suggest an investment that will earn him a higher fee - rather than one that would provide you with the best return. This rule prevents that.

It also is known as the Conflict of Interest Rule.

Referenced by...
House passes bill to revoke consumer and financial protections (2017-Jun-08)
Rule protecting retirement will take effect in June (2017-May-23)
Fiduciary Rule will protect those investing for retirement (2016-Apr-04)

Gap Insurance

Insurance to cover a gap in values.

For example, a new car is worth less immediately after you take ownership. If you finance your car and crash it soon after buying it, your insurance might not pay enough to cover the entire loan - leaving you responsible for the difference. Gap insurance covers that difference.

Gap insurance can be relatively inexpensive when purchased through your auto insurance company. However, a car dealer may offer it to you directly - at potentially more than 10 times the amount an insurance company would charge.

Referenced by...
CFBP to stop oversight of predatory lending to military members (2018-Aug-10)

Glass-Steagall

A law that prohibited commercial banks from investment activities and set up the Federal Deposit Insurance Corporation (FDIC) to guarantee bank deposits.

The law?s strict separation of commercial and investment banks was eliminated by the Gramm-Leach-Bliley Act of 1999.

Hedge Fund

Investment designed to make money regardless of whether the stock market rises or falls.

Hedge funds are made available to only wealthy investors. As a consequence, they are the least regulated by the Securities and Exchange Commission (SEC), under the presumption that these investors can handle the potential risks.

Indexing to Inflation

Allowing an investor to pay less tax on the profit of an investment, by allowing the basis (the amount you bought it for) to be increased to account for inflation.

How it works

Normally, when you sell a stock, you pay taxes on your profit - the amount you sold it for minus the basis. If you sold a stock for $150 that you had bought for $100, you would be taxed on the $50 profit.

With indexing to inflation, the basis becomes what you would have paid in today's dollars after accounting for inflation. So if you sold the same stock for $150 that you bought for the same same $100, but there had been 10 percent inflation over the time you owned it, you could claim a basis of $110, and you would be taxed on only $40.

Referenced by...
Trump would bypass Congress for $10 billion tax cut for richest (2018-Aug-30)

Indirect Lender

A lender that does not deal directly with the borrower when creating the loan.

For example, if you buy a car and the dealer processes the loan, the bank supplying the money (and that you make your payments to), is considered an indirect lender - because it dealt with the dealer rather than with you.

Referenced by...
Car loan minority protections repealed (2018-Apr-23)

Inflation

(Coming)

Interest Rate

The primary cost of a loan.

In the simplest example, if you borrow $100 with a 5-percent interest rate, the cost of the loan would be $5 (you would pay back a total of $105).

Mortgage Backed Security

When an investment bank or Government Sponsored Enterprise buys a bundle of mortgages from a lender, they in turn sell shares of those mortgages to investors. These investments are backed by the value of the property the mortgages are for. They therefore are called mortgage backed securities.

Theoretically, they are safe investments because they are made up of many mortgages. If only a few borrowers defaulted, there still would be enough pay investors their profit.

A few things happened however, that contributed to 2006 mortgage crisis (this is not the complete story, but we're presenting a small slice of it here to help understand mortgage backed securities)...

o Lenders issued mortgages to people who could not afford them. These included loans for which no income documentation was required.

o The bad loans were packaged into mortgage backed securities. Rating agencies (who are paid by the investment banks) rated the securities highly.

o Many borrowers whose mortgages were part of the security could not make their payments, while property values fell. Therefore the securities that investors bought became worthless.

Pass-through Company

A company whose income is reported on the owner's individual income tax return.

In other words, the income is passed through from the company to the owner.

Payday Loan

A short-term loan typically used to cover a temporary need - such as an emergency car repair or a smaller than usual paycheck due to an irregular work schedule.

Payday loans also are referred to as cash advance loans, deferred deposit, and deferred presentment loans - depending on the laws in a particular state.

Referenced by...
CFBP to stop oversight of predatory lending to military members (2018-Aug-10)

Payment Card

A plastic card that allows you to buy things without using cash. There are a few basic types of these cards. Transactions with them appear to work the same, but the ways they process your money differ.

Credit Card: Buying something with a credit card is essentially like borrowing money from a bank. You don't pay for it right away. Rather, the credit card company (bank) sends you a statement each month listing your purchases. You then pay the total amount for all your purchases. Alternatively, you can pay just a portion of what you owe each month. The remainder is considered a loan, and you will pay interest on the remaining amount. Interest rates typically are significantly higher than those for a traditional loan.

Debit Card: A debit card uses money you already have in a bank account. When you pay for something using s debit card, the purchase amount is subtracted (debited) from the account associated with the card. You still may receive a monthly statement, but you won't owe any money because the amount of each purchase was taken out at the time of the purchase. The exception to this is that a bank may allow you to purchase more than you have in your account - in which case you will be charged a fee, as well as being required to pay interest on the amount the bank paid for you.

Prepaid Card: Similar to a debit card, a prepaid card has a certain amount of money associated with it. For example, you might use a prepaid card for money you receive from the government. Instead of sending you a payment, the government simply adds the amount to the balance on your card. When you buy something, the value of the card is reduced by the purchase amount. You can learn more about prepaid cards at the Consumer Financial Protection Bureau website.

In recent years, cashless purchases do not necessarily require an actual card. You can, for example, pay for something with a credit card linked to your mobile phone. You simply hold the phone over an electronic reader, and the transaction is processed as if you had used a physical credit card.

Referenced by...
Supreme Court: Merchants can't suggest cost-saving credit card (2018-Jun-25)

Predatory Lending

Lending practices that exploit borrowers, including....

o Imposing unfair or abusive loan terms

o Coercing a borrower to take a loan while knowing that the borrower doesn't need or want it, or can't afford to repay it.

Referenced by...
CFBP to stop oversight of predatory lending to military members (2018-Aug-10)

Steering

When a merchant tries to influence a purchaser to use a credit card that charges the merchant a lower swipe fee.

Credit card companies may include anti-steering provisions in contracts with merchants - preventing the merchant from attempting to steer customers away from their card.

Referenced by...
Supreme Court: Merchants can't suggest cost-saving credit card (2018-Jun-25)

Subprime Loan

A type of loan offered to someone who might be considered too much of a risk for a traditional loan - whether due to a low credit score, low income, or other factors.

Because of the added risk, subprime loans are provided at a higher interest rate than traditional loans.

Swipe Fee

The fees a merchant pays to a credit card company when you pay for something using a card.

Swipe fees are passed onto consumers. It's usually in the form of higher prices for everyone, because paying with a credit card rarely costs more than paying any other way. They cost the average household $400 a year in higher prices.

That hurts lower-income families more than higher-income ones. Because lower-income families pay more often using cash, they don't receive rebates and other benefits cards offer, yet they they still pay the added costs.

Referenced by...
Supreme Court: Merchants can't suggest cost-saving credit card (2018-Jun-25)

Too Big To Fail

A term used to describe a financial institution or other business so large that if it fails, the effect to the economy could disastrous for many people outside the actual institution.

For example, a failure of a very large bank could result in people not being able to access their money.

The government works to both prevent these failures from happening, and to provide assistance if they do happen.

Referenced by...
Banking law weakens safeguards, gives half-billion to banks (2018-May-24)

Usury laws

Laws that govern the amount of interest that can be charged on a loan. Usury laws are enacted to protect consumers by preventing a bank from charging excessively high interest rates.

Volcker Rule

A federal regulation, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, that prohibits banks from engaging in certain speculative investments.

Referenced by...
Banking law weakens safeguards, gives half-billion to banks (2018-May-24)
House passes bill to revoke consumer and financial protections (2017-Jun-08)

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